Dell: Loans trump bonds

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Dell’s bumper LBO shows the high yield pendulum has swung back to loans as investors seek floating-rate exposure.

Just two weeks after the September 12 shareholder meeting that finally gave Dell’s $24.9 billion take-private deal the green light, underwriters revealed a fundamental rewrite of the debt-capital structure. What it indicated was the extent of demand from the loan market for a firm whose ebitda slumped 22.6% for the year to February 2013.

Debt financing accounts for $13.75 billion of this leveraged buyout. The bond component of the deal, originally envisaged to be around $3.25 billion, was slashed to $1.5 billion and the loan package was increased from $5.5 billion to $7.2 billion. Analysts at CreditSights described the magnitude of the changes as "stunning", pointing out that the yield on the first-lien bond was almost 82.5 basis points more than the HY BB composite index.

If the recent $49 billion Verizon bond issue demonstrated the scale of demand for yieldy paper (albeit from a top-drawer name offering a very juicy new-issue concession) from corporate bond investors, Dell’s LBO reshuffling does the same for the leveraged-loan market. The deal comprises a $1.5 billion five-year term loan C at Libor plus 275bp, a $4.66 billion 6.5-year term loan B at 350bp over Libor and a newly added €700 million seven-year term loan E at 375bp over Libor. The latter is the largest such trade in Europe since the crisis, and was increased from $500 million and reverse flexed. The first-lien bond was reduced in size and the proposed second-lien paper scrapped altogether.

Some observers had reckoned that the delay to this deal since February (caused by Carl Icahn’s attempts to derail it) could have cost the firm an additional 200bp in funding costs. But the overwhelming appetite now present in the leveraged-loan market means that founder Michael Dell and private equity partner Silver Lake Partners have got themselves a cheaper deal.

All the loans in this huge transaction are covenant-lite. Some $188.7 billion of covenant-lite loans have been written so far in 2013, more than five times the $35 billion volume issued in the first nine months of 2012. It is a stark illustration of growing concern among sub-investment-grade investors at the prospect of rising rates, and the desire by issuers to have prepayable debt for the same reason.

The Dell LBO demonstrates the risk to existing bondholders of heavily debt-driven LBO financings, particularly those that push the corporate out of investment-grade territory. In line with typical high-grade securities, Dell’s existing bonds do not have change-of-control covenants, which means that they will be subordinated to new debt. And there is an awful lot of the latter. Following the deal, Dell’s debt load will be $18 billion, including a $2 billion loan from Microsoft. Beforehand it was $6.8 billion.